Bank reforms sparking economic growth, job creation, Carney says

Guelph Mercury

MONTREAL — Bank of Canada governor Mark Carney says there is evidence that reforms being imposed on the world’s largest banks — often against their will — are contributing to economic growth and job creation, rather than the opposite as critics claim.

Canada’s top central banker, who holds the prestigious position of head of the Financial Stability Board overseeing international reform of the sector, said he will insist on timely and consistent implementation of agreed reforms.

Carney also dismissed critics, mainly financiers on Wall Street, who say that requiring banks to hold more capital and reduce risk-taking has already restrained investments and economy activity.

“Measures to strengthen financial stability support economic growth and create jobs rather than hold them back, even in the short term,” he said Thursday in a speech to the Canadian Club of Montreal.

“Credit growth has resumed in those countries where financial institutions have decisively strengthened their balance sheets, refocused their core business activities and improved their funding resources — in other words, returned to a more sustainable business model.”

The issue is at the heart of a now famous behind-closed-doors confrontation last year with JPMorgan Chase head Jamie Dimon, who took out his frustration on Carney for the restrictions being imposed on the banking sector.

Carney, who came from the world of private sector financing at Goldman Sachs, is reported to have held his ground in private. In public he has continued to show little patience for the system as it existed prior to the 2008 Wall Street collapse.

An advance copy of Carney’s speech notes that in 2008, major banks in the United States, the United Kingdom, Germany, France, Ireland, the Netherlands and Belgium either failed or needed rescue from the state.

“Gallingly, on the eve of their collapse, every bank boasted at capital levels well in excess of the standards of the time,” Carney points out.

Those assurances proved meaningless, he said. That’s because many of the banks were hiding risks off their balance sheets, or those balance sheets were “stuffed with supposedly risk-free structured products that turned out to be lethally toxic.”

Even today, after the mess, investors continue to believe that when worst comes to worst, governments once again will be there to bail out a failing large bank — the so-called too-big-to-fail reasoning that the damage caused by a big bank collapse would be worse than the cost of rescuing it.

That mentality is good for the banks, because it allows them to access credit at rates below what they would have to pay if risks were properly appraised, he said. But it is also a mentality that encourages foolish risk-taking, because banks and investors think they have a net below them.

Carney said the message by governments should be: never again. Regulations, he adds, should be put in place to ensure the words have meaning.

“I can assure you, based on our recent conversations in Mexico (last weekend), that the G20 and the FSB remain resolute in their intention to create a more resilient, efficient global financial system.”

Carney said he believes the global system is now safer than it was prior to the collapse of 2007 and 2008.

But more needs to be accomplished, he said. The too-big-to-fail mentality needs to change, and systemically important institutions need to have even bigger reserves on hand to ensure their soundness.

As for Canada, he said domestic banks are in position to meet all the new standards being phased in over the next six years starting in 2013.